Abstract
Although expected utility theory and the classical mean variance diversification theory of Markowitz assert that optimal diversification depends on the joint distribution of returns, investors tend to ignore these well-accepted theoretical approaches in favor of the naive investment strategy promulgated in the Babylonian Talmud called the 1/3 rule (or the 1/n rule for n assets),which assigns an equal weight to each security in the portfolio. In testing the efficiency of the 1/n rule, the authors find that it outperforms the mean variance rule for individual small portfolios out of sample, but for large portfolios (i.e., institutional investors) the Markowitz strategy is superior. The advantage of the 1/n rule in the out-of-sample analysis is the absence of exposures to estimation errors.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.